Although most of the literature on the credit channel focuses on spending by business firms,the credit channel should apply equally as well to consumer spending,particularly on consumer durables and housing.Declines in bank lending induced by a monetary contraction should cause a decline in durables and housing purchases by consumers who do not have access to other sources of credit.Similarly,increases in interest rates cause a deterioration in household balance-sheets because consumers'cash flow is adversely affected.
Another way of looking at how the balance-sheet channel may operate through consumers is to consider liquidity effects on consumer durable and housing expenditure--found to have been important factors during the Great Depression (Mishkin(978)).In the liquidity-effects view,balance-sheet effects work through their impact on consumers'desire to spend rather than on lenders' desire to lend.